ESIC to park surplus funds in stock market via ETFs

Budget 2023, subsidies
The government is under pressure to cut subsidies and maintain fiscal discipline at a time when political situation warrants a populist Budget 2023.

The Employees’ State Insurance Corporation will invest its surplus funds in the stock market as it looks to earn better returns. A proposal to invest in the market through exchange traded funds has been approved in the 189th meeting of ESIC, and the plan has been okayed by Union labour minister Bhupender Yadav. The ESIC has 35 million insured persons eligible for benefits as on March 31, 2022. Unlike the Employees’ Provident Fund Organisation, the ESIC has not invested in equities till now.

The ESIC has been looking to diversify its investments to support an increasing number of insured workers under the ESI scheme. The decision was taken in the light of the relatively low returns on investments in various debt instruments which would have proved insufficient to cover insured workers as well as their dependents under the ambit of ESI scheme. As on March 31, 2020, the ESIC had an investment corpus of Rs 1.07 trillion and is estimated to be close to Rs 1.3 trillion at present. Of this, nearly Rs 26,171 crore was earmarked as reserve fund.

The balance has been parked in the fixed deposits of banks, a special deposit with the central government and other instruments based on its investment norms.

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The proposed investment in stocks will be kicked off with 5% of the surplus funds and the share will increase to 15%, based on the review of the investment after two quarters, the labour ministry said. According to a statement, the investment will be confined to exchanged traded funds in Nifty and Sensex and will be managed by fund managers of asset management companies (AMSs). Further, the existing custodian, external concurrent auditor and consultant looking after the debt investments will monitor these investments.

In 2015, the labour ministry had permitted the ESIC to invest up to 15% of its surplus in equity for better returns. Currently, the social security organisation has a surplus of nearly Rs 65,000 crore. This amount rises by over Rs 8,000-9,000 crore each year and could be higher than this in the coming years because the ESIC is widening its coverage by including gig workers in its fold. 

What is the ESI scheme?

Constituted under the Employees’ State Insurance Act, the ESI scheme is a social safety net for protecting employees. It looks to provide insurance cover to employees in cases of sickness, maternity, disablement and death due to injury while being employed. It provides medical care to insured persons and their families. Employees of factories and other establishment’s viz Road Transport, Hotels, Restaurants, Cinemas, Newspaper, Shops, and Educational/Medical Institutions wherein 10 or more people are employed are entitled to social security cover.

Currently, all workers who make Rs 21,000 or less per month are covered under the ESIC Act. The Act mandates that the employer contribute 3.25% while the employee contributes 0.75% of the salary towards insurance. This amount is used to provide medical and cash benefits to its subscribers and their family.

Need for social security in India

India is witnessing a jump in employment rates and as more join the formal workforce; the need will become even greater to bolster the social safety net. This is not to say that those in the informal sector should be excluded from social safety. In fact, that is one of the glaring challenges for the government currently. India’s unemployment rate declined to 7.2% in July-September this year for persons aged 15 years and above in urban areas compared to 9.8% last year, according to the latest Periodic Labour Force Survey released by the NSO.

Growth in ESIC and EPFO contributions mean expansion in healthcare, public long-term infrastructure, which further aids in higher productivity, lower healthcare cost, beneficial logistics and infrastructure expenditure allows faster investment in manufacturing (both for domestic and exports segments). However, India’s formal sector stands at less than 13% today, and even out of this meagre number, only 10% of the workforce is secured under ESIC, i.e., 3.39 crore members, and only 12% covered under EPFO, i.e. 4.12 crore members.

The government has shifted its focus to strengthen the social security net and has ESIC to focus on improving the existing infrastructure. Under this, infrastructure of ESIC hospitals and dispensaries is expected to modernise in a phased manner. However, like every other announced government initiative, the huge gap between announcing and executing still remains a problem.

Meanwhile, the subscribers of three major social security schemes viz the Employees’ Provident Fund (EPF) Scheme, the Employees’ State Insurance (ESI) Scheme and the National Pension Scheme (NPS), have grown with over 38.5 lakhs new subscribers joining and contributing in the NPS central government, state governments, and other corporate schemes during September, 2017 to September, 2022, according to data released by the National Statistical Office (NSO).